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Rating Action:

Moody's affirms CIGNA's ratings (senior at Baa2) after announcement of reinsurance transaction

05 Feb 2013

New York, February 05, 2013 -- Moody's Investors Service has affirmed the Baa2 senior debt rating of CIGNA Corporation (CIGNA; NYSE:CI) and the A2 insurance financial strength (IFS) ratings of its operating subsidiaries (see list below) with a stable outlook following the announcement that it had entered into a definitive agreement with Berkshire Hathaway Life Insurance Company of Nebraska ("Berkshire Life") and National Indemnity Company (Aa1 IFS), the parent of Berkshire Life ("NICO"). Under the agreement Berkshire Life will reinsure CIGNA's run-off Guaranteed Minimum Death Benefits (VADBe) and Guaranteed Minimum Income Benefits (GMIB) businesses. The total reinsurance premium to be paid by CIGNA is $2.2 billion, with one third of the amount paid at the time of the announcement and the balance to be paid during the period ending April 30, 2013.

RATINGS RATIONALE

Moody's commented that the rating affirmation and stable outlook of CIGNA reflects the combination of the benefits to CIGNA as a result of the removal of a substantial amount of the interest rate and market exposure risk associated with the business, offset by the short-term negative impact to the company's financial flexibility as a result of the cost and financing of the transaction. While the contracts associated with this business have been in a steady run-off mode over the past several years and CIGNA has implemented a dynamic hedging program to reduce its equity market exposure, the rating agency noted that the business has the potential to produce net income volatility and could have a material adverse effect on CIGNA if actual experience differs from assumptions made in reserving the liabilities. The reinsurance coverage absorbs a significant portion of potential future adverse claim development. However, the extreme tail-risk stress scenario is still retained by CIGNA as the reinsurance agreement has a $4 billion payout cap, with any payments in excess of $4 billion under these contracts reverting back to CIGNA.

Moody's added that offsetting the positive implications of the transaction is the high cost to CIGNA to enter into the transaction with Berkshire Life and NICO. The net after-tax impact (after the $2.2 billion cash payment to Berkshire Life and CIGNA's reserve release) is estimated to be $500 million, which is viewed as the net cost of the transaction to CIGNA. According to Moody's senior vice president, Steve Zaharuk, "While the transaction cost is manageable given CIGNA's earnings and cash generation potential, the requirement to pay $2.2 billion in cash within a three month period may require the use of holding company short-term assets and short term borrowing while the company liquidates the assets backing these liabilities." As a result of expected dividends to the parent company during 2013 of over $1 billion and the steady sale of the assets, CIGNA's financial flexibility metrics and holding company liquidity position at the end of 2013 should be returned to the levels expected prior to the transaction with debt to capital (where debt includes unfunded pension obligations and operating leases) approaching the 40% level.

Moody's indicated that CIGNA's ratings could be upgraded if: 1) EBITDA margins remain above 10% with EBITDA interest coverage of 9x, 2) consolidated NAIC RBC ratio is maintained at or above 300% of company action level (CAL), 3) overall annual medical membership growth is 2% or more, and 4) financial leverage is brought down below 40%. However, the ratings could be downgraded if: 1) EBITDA earnings margins decline below 5%, 2) EBITDA coverage ratio falls below 5 times, 3) financial leverage increases above 50%, 4) consolidated RBC ratio falls below 250% CAL, or 5) integration problems that result in a >10% loss of membership and/or a >10% reduction in earnings.

The principal methodology used in this rating is Moody's Rating Methodology for U.S. Health Insurance Companies published in May 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

The following ratings were affirmed with a stable outlook:

CIGNA Corporation -- senior unsecured debt rating at Baa2; senior unsecured debt shelf rating at (P)Baa2; subordinated debt shelf rating at (P)Baa3; preferred stock shelf rating at (P)Ba1; short-term debt rating for commercial paper at Prime-2;

Connecticut General Life Insurance Company -- insurance financial strength rating at A2;

The Life Insurance Company of North America -- insurance financial strength rating at A2;

CIGNA Health and Life Insurance Company -- insurance financial strength rating at A2;

HealthSpring of Tennessee, Inc. -- insurance financial strength rating at A2;

HealthSpring of Alabama, Inc. -- insurance financial strength rating at A2;

Bravo Health of Pennsylvania, Inc. -- insurance financial strength rating at A2.

CIGNA Corporation, headquartered in Philadelphia, PA, provides employee benefits, including health care products and services, and group disability, life and accident insurance throughout the United States. It also provides life, accident, health and expatriate employee benefits insurance coverage in selected international markets, primarily in Asia and Europe. For the first nine months of 2011, the company reported consolidated GAAP revenues of approximately $21.6 billion, shareholders' equity of approximately $9.5 billion, and total enrollment of 12.7 million medical members (excluding Part D membership).

Moody's insurance financial strength ratings are opinions of the ability of insurance companies to pay punctually senior policyholder claims and obligations.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Stephen Zaharuk
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert Riegel
MD - Insurance
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms CIGNA's ratings (senior at Baa2) after announcement of reinsurance transaction
No Related Data.
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